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Buy a Home With a Cash or Mortgage: Which is Better?

If you are lucky enough to have the funds, you can choose to buy a house with cash or a mortgage. Which is the winning option between cash vs mortgage?

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Not many of us are fortunate enough to have sufficient cash to even consider purchasing a home in well, cash. And yet if we are faced with that choice now, which would be a wiser move towards home ownership – a cash purchase or taking out a mortgage?

It is a common notion for many people that debt of any kind is not good for their financial health. Even in these times of crisis, much has been said about how one should work to pay off debt rather than taking on more. The reality however, is that not all types of debt are necessarily unhealthy. And if there's a particular debt that can be considered as "good," it is mortgage. A Mortgage allows you obtain an asset, which, while still is a loan, has the potential to rise in value in the future.

The Advantages of Buying a Home in Cash

Of course, there are also certain advantages to buying a home in cash. For those who are able to do so, these are the benefits of doing an all-cash purchase on a home:

1. Complete ownership of one's home

Without monthly payments and the risk of foreclosure to worry about, you would have complete peace of mind, knowing that you will always have a home to reside in.

2. Eliminate mortgage interest

A property's purchase price can double, perhaps even triple from that of the actual cost, when you take into account the mortgage interest paid for the duration of a home loan.

3. Greater purchasing power

Because buying in cash almost always ends up in faster negotiations and with less of the complications and costs that financing can bring, cash buyers often have the leverage to haggle for a discount on the price of the property.

4. Property can be used as security for a loan

The home can later be used as collateral for a loan in case the homeowner has a need for cash.

The Advantages of Financing Home

On the other hand, even if you do have the money to pay for a house upfront, it would still be wise to consider the benefits of a home loan. Depending on your particular financial situation and your future plans, a home mortgage may actually benefit you more in the long run. Financing a home purchase would allow the homeowner or borrower to:

1. Take full advantage of the valuable tax benefits of a mortgage

The country's tax rates are favorable for homeowners and that is why a home mortgage can serve as an ideal tax shelter.

2. Mortgage interest

Interest is the biggest factor of your mortgage payment and can be fully deducted from your federal tax return and in some areas, from the state tax return as well.

3. Real estate property taxes

Taxes on a first home and a vacation home can also be applied as tax deductions for income tax purposes.

4. Local property Tax

Property tax is deductible from your federal income tax return.

5. Capital gains exclusion

Exclusion of up to $250,000 in profit for an individual or $500,000 for a married couple, is applicable when you sell your home provided you have lived there for two of the past five years.

6. Build up and use equity

Borrowing against the value of one's home is possible not only for those who completely own their homes but also for mortgage holders. The difference is that for mortgage borrowers, you can only loan against your home equity (the amount you have already paid against the actual value of your home). The longer you have been able to pay on your mortgage, the higher you should have paid on the principal of your loan, and the greater your home equity.

Home equity loans and HELOCs (Home Equity Line of Credit) are some of the most common types of home loans that allow homeowners to borrow money at lower interest rates compared to credit cards and other personal loans.

Diversify portfolio

By deciding to pay cash for a home upfront, you could also be missing out on other investment opportunities that are open to you. True, a home is also considered a valued asset and a major investment. But then again even if you have less debt (or none at all), you would be tying up a big chunk of your funds in real estate which would be difficult to sell or turn to cash should emergency needs or opportunities for a higher return on your money come up.

Home ownership may be one of the most major financial steps that you may take in a lifetime. When weighing the benefits of buying in cash versus taking out a mortgage, consider all aspects of both options before making that giant leap.

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Ask a Question

Saturday, 14 May 2016 4:11 AM
<p>Cash anytime, before the mortgage...why pay 3 times the value of your house to a bank, it's not like you will be able to sell it for the total purchase price. A mortgage slaves you to the bank, you pretty much work for the bank, and diminish your cash flow. You can always borrow against your house if the circumstances requires it, property taxes are deductible mortgage or not. so yah cash anytime, not to mention the peace of mind and the freedom from monthly payments is priceless.</p>
Friday, 23 Nov 2012 3:02 PM
<p>All the points made for a mortgage apply to not having one as well. The property taxes are deductible wether you have a mortgage or not. If you own your home free and clear, you can borrow more against it if you need to. Why would I need a tax deduction on interest if I have no payments? And finally, if I have no payments all that money can be used for investing every month anyway.</p>
Tuesday, 25 Sep 2012 3:40 PM
<p>I have been a Realtor for 24 years and quite frankly, getting a mortgage takes an act of God these<br>days as the banks are not privy to providing the loans for the homes.  I can understand that as the number of foreclosures in the country today are at an all time high...why would they want to subject themselves to the same situation again.....the folks with money know the market and know the values of property and will pay cash when the price is right....</p>
Tuesday, 25 Sep 2012 3:19 PM
<p>Correction: renter -&gt; buyer</p>
Tuesday, 25 Sep 2012 3:19 PM
<p>You are a mortgage company, lender. Of course debt is good for you. Debt is not better than paying for a home cash. This article is very slated and misleads the renter. For example: property tax is deductible if you have a mortgage or not. </p>
Tuesday, 08 Jun 2010 3:41 AM
<p>Buying a house completely in cash sounds crazy. I don’t know many people who have that much cash on hand. And I never thought of debt as good. This article really put it in perspective for me though. Now it makes more since how debt could be good.<br></p>

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